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Happy taxation: Increasing tax compliance through positive rewards?
1 Forthcoming in the Journal of Public PolicyHilke Brockmann
School of Humanities and Social Sciences, Jacobs University Bremen, Germany Email: h.brockmann@jacobs-university.de
Philipp Genschel
Robert Schuman Centre for Advanced Studies, European University Institute, Italy Email: philipp.genschel@eui.eu
Laura Seelkopf2
Research Center on Inequality and Social Policy, University of Bremen, Germany Email: laura.seelkopf@uni-bremen.de
Abstract
Can governments increase tax compliance by rewarding honest taxpayers? We conduct a controlled laboratory experiment comparing tax compliance under a ‘deterrence’ baseline to tax compliance under two ‘reward’ treatments: a ‘donation’ treatment giving taxpayers a say in the spending purposes of their payments, and a ‘lucky’ treatment giving taxpayers the (highly unlikely) chance of winning a lottery. The reward treatments significantly affect tax behavior but not in a straight forward way. While female participants alter their behavior as expected and comply somewhat more, men strongly react in the opposite way: They evade a much higher percentage of taxes than under the baseline. Apparently, there is no one-size-fits-all approach to boost tax compliance.
Keywords: Laboratory experiment, tax evasion, tax compliance, gender, warm glow, lottery
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We thank Thomas Brambor, Sebastian Dellepiane-Avellaneda, Ingo Fiedler, Christian von Haldenwang, Jaemin Shim, Stefan Traub, Clara Volintiru, Konstantin Vössing, and Nan Zhang for helpful comments, Dirk Schulte am Hülse and Moritz Bubek for technical support and Peter Heide and Taraq Kamda for excellent research assistance. The experiment was funded by the Nowetas Foundation. Philipp Genschel and Laura Seelkopf acknowledge funding from the German Research Foundation (Collaborative Research Center 597).
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1. Sticks, Norms and Carrots
Nobody likes to pay taxes. Tax payments are compulsory and unrequited: people are legally obliged to make them but cannot expect any specific benefit in return like a piece of public property, or a preferential treatment in a public hospital. Why do people comply? One prominent answer is that people pay taxes because the government forces them to. The entire machinery of taxation operates under a deterrence approach (e.g. Feld et al. 2006) that threatens non-compliant tax payers with audits, fines, and criminal punishment. An alternative answer holds that people pay taxes because society obliges them to. Taxes are at the heart of the social contract. They define what people owe to each other collectively. According to this civic duty approach, it is feelings of public responsibility that moves people towards tax compliance (e.g. Kirchler et al. 2008).
While deterrence threats and civic norms certainly raise tax compliance, they hardly ever ensure full compliance. Even in fairly well administered and integrated societies tax evasion is common. According to one estimate, for instance, the 28 member states of the European Union lose 864 billion Euros in annual tax revenues to tax evasion (Murphy 2012). Pressed by high spending requirements and high political obstacles to tax increases, some governments have recently experimented with recovering some of these losses through a new rewards approach to tax compliance. The idea is to curb tax evasion by providing positive rewards for individual tax compliance. The perhaps most prominent example of this trend is the spread of receipt-based VAT lotteries. These lotteries incentivize correct invoicing by allowing consumers to submit purchase receipts as lottery tickets (Fooken et al. 2014). Another example is a 2006 Spanish income tax law allowing Spanish taxpayers to earmark 0.7 percent
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of their income tax for a charitable purpose (European Research Network on Philanthropy n.d.).
In this paper, we investigate the compliance effects of positive rewards. We focus on two types of rewards in particular. On the one hand, we analyse the effects of a lucky reward that links tax compliance to the chance of winning in a lottery (along the lines of a VAT lottery). On the other hand, we examine a donation reward that allows compliant taxpayers to earmark their individual payments for specific spending purposes (along the lines of the Spanish income tax law). We hypothesize that both rewards increase the “procedural utility” (Frey et al. 2004) of the taxpaying situation to the taxpayer in ways that enhance compliance.
We test this hypothesis in a laboratory experiment that compares tax compliance under the lucky and the donation treatment to tax compliance under a deterrence baseline. Our findings offer partial support. The evidence confirms that the two reward treatments significantly affect taxpayer behaviour (in line with the hypothesis). Yet the rewards do not unambiguously increase tax compliance in all participants (contrary to the hypothesis). The reason is an interaction effect with gender. The reward treatments increase tax compliance in women but dramatically decrease compliance in men. This gender-by-treatment interaction is an important finding because it alerts policy makers and policy analysts to the general problem of gender heterogeneities in the treatment effects of tax reforms and other policy interventions (e.g. Alesina et al. 2011). It should stimulate more political science research on gender-differences in risk preference and social attitude (e.g. Croson and Gneezy 2009).
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The rest of the paper is structured into 5 parts. In the next section, we review the literature and elaborate our research question (section 2). Why study the effect of positive rewards on tax compliance? We then introduce our experimental setting (section 3), and present our empirical findings (section 4). We explore explanations for the reward-by-gender interaction effect on tax compliance (section 5) and end with a brief note on policy implications (section 6).
2. How to improve Tax Compliance?
“Governments need money. Modern governments need lots of money.” (Steinmo 1993:1) Collecting this money is a tricky problem because incentives for tax evasion are pervasive. Governments have tried various approaches to tackling this problem. They can roughly be sorted into three groups: threat-based approaches that deter citizens into tax compliance, norm-based approaches that oblige citizens to comply, and reward-based approaches that lure citizens into compliance. As a brief review of the literature will show, the first two approaches have attracted considerable attention in the empirical tax compliance literature, while research on reward-based approaches is still comparatively sketchy.
Threats
The perhaps most obvious way to ensure tax compliance is to criminalize non-compliance: Governments deter citizens into paying taxes by the threat of audits, fines, and legal prosecution. In Allingham and Sandmo’s famous model (1972), the level of tax evasion is directly and negatively associated with the probability of detection and the size of the fine.
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The problem with the deterrence approach is that it is costly for the government and stressful for tax payers. The government has to waste time, effort and personnel on hunting down tax evaders. The tax payer has to worry about the dear consequences of inadvertent non-compliance. Both effects limit the viability and usefulness of the approach. Only about 1.1 per cent of individual income tax returns were audited in the United States in 2010 (Wood 2011). Still a Google-search (12 May 2015) for the word-string “tax stressful” turned up over 14 million internet pages with advice on how to reduce tax season related stress. Apparently, even mild enforcement activity can cause great anxiety, presumably because taxpayers overweight the low probability of being audited (Alm 2011: 63). This anxiety, in turn, may have an “alienation effect" that inadvertently fuels evasion (Feld et al. 2006:6, Kinsey 1992). As various empirical studies show, higher audit probabilities and fines do not unambiguously raise tax compliance (for a review see Kirchler et al. 2008: 214-215). In fact, they sometimes undermine it.
In 2007, the United States Internal Revenue Service (IRS) introduced additional penalties for US citizens submitting incomplete tax returns ostensibly because the number of wrongful returns had been very high in the previous year. While understandable, the approach was unsuccessful. Allegedly, it resulted in a 22 % increase in tax fraud the following year. According to Martin and Dolan, “IRS policy makers fell afoul of their intended outcome by communicating a much more invasive and undercutting normative message: ‘look at all the people who are doing this unwanted thing’” (2010).
6 Norms
Given the limitations of the deterrence approach, some authors emphasize the importance of “voluntary” compliance (e.g. Kirchler et al. 2008). In this perspective it is not enough to threaten tax evaders by negative sanctions. It is also important to appeal to taxpayers’ sense of civic duty. To be sure, feelings of civic obligation vary in social and cultural factors. For instance, women tend to be more tax compliant than men (e.g. Friedland et al. 1978, Spicer & Becker 1980, van Dijke & Verboon 2010), religious believers are generally more compliant than non-believers (Torgler 2006), and some national and subnational cultures show higher tax morals than others (Torgler and Schneider 2007). Yet there are also various ways in which the government can foster citizens’ sense of civic duty.
One way is to improve citizen participation: Giving citizens a say in government increases the likelihood that citizens perceive the taxes imposed on them as useful and fair. Historically, democracy was invented for the purpose of increasing tax compliance and revenue buoyancy (e.g. Tilly 2009). Empirically, various studies have shown that democratic procedures increase tax compliance in laboratory settings (Alm et al. 1993; Wahl et al. 2010). Torgler (2005) presents survey evidence indicating that direct democratic rights have a strong positive effect on tax morale in a cross-section of Swiss Cantons.
A second way to reinforce feelings of civic duty is by improving government performance: Generally, citizens are more willing to pay if they feel the government delivers valuable public goods and services in return, i..e if they trust the government not to waste their money. Svallfors (2013) presents survey evidence that citizens who perceive government institutions
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as efficient and fair are more likely to favour higher taxes in a sample of 29 European countries. A similar study of 4 African countries also shows a significant association of satisfaction with public services and positive tax compliance attitudes (Ali et al. 2014). Corruption, by contrast, depresses tax collections (Timmons and Garfias 2015). Experimental approaches also suggest that the provision of public goods increases tax compliance (Torgler 2002:671).
Finally, the sense of civic duty can be increased by reciprocation: if the government wants to be trusted by citizens, it has to show trust in citizens in return. Respectful treatment of taxpayers by tax officials has been shown to promote tax compliance (Feld and Frey 2007). Fair procedures, equal treatment of taxpayers at the individual and group level, the avoidance of overly inquisitive audits, and a user-friendly tax administration are also hypothesized to increase tax compliance (Kirchler et al. 2008): The easier it is for citizens to comply with the tax system, the less likely it is that they feel alienated and harassed by it. Various governments experiment with administrative reforms to make life easier for taxpayers (Alm et al. 2010). Singapore, for instance, has moved from a hard-copy filing system to a paperless electronic system and a one-stop service to answer inquiries. It also tried to change the attitude of tax officials towards tax payers (Alm & Torgler 2011: 649, Fn. 15). Also in Romania, local governments have experimented with online payment systems to facilitate timely and correct tax paymentsi
8 Rewards
Even in a high-trust environment with a well-functioning government and civic-minded citizens, paying taxes remains a nuisance. Taxes are costly and people generally avoid expenses of any sort (Sussman and Olivola 2011: S91). Also, taxes are impersonal and don’t give taxpayers any sense of individual ownership and agency (Lamberton et al. 2014: 2). Various governments have tried to mitigate these nuisance factors through positive rewards. The rewards can be either material or immaterial.
Material rewards usually come in the guise of lotteries. For instance, Taiwan operates a receipt-based tax lottery to increase sales tax (VAT) compliance since the 1950s. China introduced a VAT-lottery in the 1990s (Wan 2010). More recently, some European countries followed suit including Malta, Slovakia, Portugal, and Romaniaii
(Fooken et al. 2014). Local authorities in Peru and Indonesia raffle off bicycles, cars, and TV-sets to incentivize payments of property taxes and motor vehicle taxesiii
. And Martin and Dolan (2010) recently suggested a lottery scheme to increase timely submissions of income tax declarations in the US.
Immaterial rewards aim to increase the taxpayers’ sense of ownership by earmarking tax revenues for specific spending purposes (hypothecation). The underlying assumption is that citizens pay taxes more willingly if they know what they are paying for (Seely 2011). Social Security Contributions are perhaps the most common example of a hypothecated tax. Fuel taxes and green taxes are also often earmarked. While hypothecation usually comes in the form of government self-binding (the government promises to use certain tax proceeds for specific purposes only), a few governments have taken the idea one step further and allow
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individual taxpayers to earmark their payments. Spain, for instance, allows individual taxpayers to allocate 0.7 percent of their income tax liability to either the Catholic Church or to charitable organizations or to the state (European Research Network on Philanthropy n.d.). Japan recently introduced a so-called hometown tax scheme under which city residents can allocate a proportion of their income tax payments to a rural town of their choice. Reportedly the scheme is very popular with taxpayers. Yet there are problems: taxpayers allocate their hometown taxes mostly to nice, touristy communities in attractive locations and forget about the drab rest of the country. Local governments, in turn, engage in a wasteful competition for taxpayers’ attention (The Economist 2015).
While tax practitioners show a keen interest in positive rewards, the empirical tax compliance literature has largely ignored them so far (Feld et al. 2006). There is limited research on tax lotteries. For instance, Wan presents observational evidence to suggest that the Chines lottery has increased tax revenues (Wan 2010). The largely anecdotal research on Europe shows mixed results by contrast. While tax lotteries seem to be popular, their revenue and compliance effects are unclear (Fooken et al. 2014: 15). Alm and colleagues (1992) explore tax lotteries in a laboratory setting. Their findings suggest that a lottery more effectively increases compliance than two alternative reward strategies (fixed rewards and audit reductions).
Unfortunately, Alm et al.’s lottery treatment involves an uncommonly high probability of winning (one in 25) and an uncommonly low lottery prize (the average earnings of the entire experimental session). This tends to undermine experimental realism because the defining
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feature of real-world lotteries is a very low probability of winning combined with a very high prize. In the German case, for instance, the standard lotto offers a one in 140 million chance of winning a prize of, on average, 5.2 million Euros. The low probability of winning makes lotteries fiscally attractive for governments; the high rewards make them attractive for consumers. High rewards are materially attractive because individuals tend to overweight the low probability of winning the jackpot, and hence generally judge the attractiveness of lotteries by the size of the jackpot and not by the probability of winning it (Perez and Humphreys 2013: 918). High rewards are also emotionally attractive. Research suggests that people buy lottery tickets because it makes them feel lucky, because it allows them to dream of a better life, and because it is an enjoyable pastime activity shared and discussed with peers (Ariyabuddhiphongs 2011, Casey 2008). There are good reasons, therefore, to expect a well-defined tax lottery to increase revenues at little fiscal costs.
To the best of our knowledge, there are no observational studies of the compliance effects of the Japanese or the Spanish tax hypothecation schemes. Laboratory research on radical hypothecation schemes is also lacking. Yet, Lamberton, De Neve and Norton have shown that giving taxpayers the opportunity to signal a non-binding spending preference can raise tax compliance (Lamberton et al. 2014). Allegedly, two mechanisms account for this result. First, the signaling opportunity raises taxpayers’ awareness of the potential usefulness of their tax payment and thus helps them mentally recouple payment and benefits. Second, the signaling opportunity turns taxpayers from pure policy-takers into partial policy-makers, and gives them a sense of authorship. Conceivably, a third mechanism reinforces these two: “warm glow giving” (Andreoni 1990). To the extent that individual taxpayers are given influence over
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the use of their money they can more easily perceive themselves as benefactors of society, and indulge in the heart-warming feeling of being kind. As various studies into voluntary giving have shown, people sometimes happily and spontaneously spend money on others (Karlan & List 2007, Meier & Stutzer 2008). Even compulsory contributions to charity can be a rewarding experience (Harbaugh et al. 2007). In conclusion, there are plausible reasons to believe that governments can increase voluntary compliance by giving individual taxpayers a real, rather than just an advisory, influence over public expenditure.
This paper adds to the experimental research on positive rewards for tax compliance in two principal ways. First, it offers an experimentally realistic investigation of the compliance effects of tax lotteries by using lower winning probabilities and higher prizes than Alm et al. (1992). Second, it explores the compliance effects of a tax system that gives taxpayers a real, rather than just advisory (Lamberton et al. 2014), say in the selection of spending purposes.
3. The Experimental Design
The Setup
The set-up of our study resembles earlier tax compliance experiments (see Torgler 2002 for an overview): The participants work for income, decide how much of this income to declare to the tax authority and then pay taxes on their declared income. Their tax declaration is subject to random audits. If participants are caught cheating, they are fined.
Two features help to give the experiment a realistic ‘look’ (“mundane realism”) and ‘feel’ (“experimental realism”) (McDermott 2002). First, we incorporate tax language and
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terminology in order to encourage participants to perceive the decision problem as a tax compliance problem and trigger the respective civic norms and concepts (see Cummings et al. 2009: 452). Second, we embed the experiment into the participants’ real-life situation. We recruit all participants from the students of one campus university (Jacobs University Bremen, Germany). The experimental tax revenues go directly to the representative student government. They thus contribute to a ‘real’ government providing ‘real’ public goods on campus (sports, entertainment, limited social assistance, education) from which the participants benefit only very marginally, if at all. In other experiments, by contrast, tax revenues are collected for and redistributed among the small group of participants (e.g. Alm et al. 1993), and thus resemble club goods more than public goods.
Table 1 summarizes our exact settings. The experiment consists of six rounds. In each round, the participants answer 8 trivia questions on a computer. After each round they receive a fixed income of 240 token (100 tokens = 1 Euro), which increases by 20 tokens for each question answered correctly. After each round, they are informed of their income and are asked to fill in a tax declaration. The rate of tax increases from 10 percent in the first round to 60 percent in the final round to mirror the progressiveness of the income tax schedule. The tax declarations are audited with a probability of 5 percent. In case of non-compliance, the participant is fined. The level of the fine is equivalent to the amount of tax evaded. Immediately after the experiment, the participants receive their experimental gross-income (minus fines) in cash, and are asked to pay their declared tax dues in cash in a separate, unobserved room. The collected taxes then go to the student government. The participants receive detailed instructions in advance about the purpose and design of the experiment,
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and acknowledge this by signing a consent form. They know the rules of the game, i.e. the pay scheme, the tax rates, the audit probability, the size of the fines, the conversion rate of tokens into Euros, and the recipient of their tax payments.
Table 1 about here
The Participants
The participants are all selected from the student population of Jacobs University, a small campus university in Germany. We advertised the experiment through posters and flyers on campus. Interested students signed up online and were allocated an individual time slot in the laboratory. They entered the laboratory alone without any contact to other participants. After signing the consent form, they were led to a computer room in which they conducted the experiment in complete privacy behind a closed door and without seeing any other person, thus simulating the private setting in which most people prepare their tax declarations in the real world. Table 2 provides descriptive data on the participants. A total of 97 students participatediv. On average, the participants were considerably younger than the general population (age range 17 – 29 years) and, being students, they were also better educatedv
. The gender-ratio was balanced. Roughly half of the participants identified themselves as being religious. Nearly three quarters ranked themselves as middle-class. The disciplinary backgrounds were diverse. Only seven self-identified economics students participated in the experiment. Unfortunately, we couldn’t directly check for the nationality of the participants. Since Jacobs University is small (roughly 1300 students) and very
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international (students come from more than 110 nations) this information would have compromised the participants’ anonymity. Instead we used the World Value Survey to control for home-country tax morale: we ordered all countries covered by the World Value Survey according to their national attitudes towards tax evasionvi
; we then sorted the countries on the list into seven groups with roughly similar levels of tax morale; finally we asked the participants to identify the country group containing their home-country. Table 2 also provides information on the participants’ performance in the lab in terms of knowledge (i.e. number of trivia questions answered correctly) and gross lab-income (measured in tokens). As the table shows there were no major socio-demographic or performance differences between the three treatment groups.
Table 2 about here
The Treatments
The experiment followed a three-group between-subjects design: Participants were randomly assigned to a baseline, a donation or a lucky group (see table 2). The expected monetary utility of tax (non-) compliance was essentially equal across these groups:
UE = (1 - a) (I – t d) + a [I – t d – p t (I – d)]
This is essentially Allingham and Sandmo’s standard deterrence model of tax compliance (1972). Each participant has to choose how much income (I) to declare (d), which is than taxed (t) and in the case of an audit (a), subjected to a penalty (p) if the participant has
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cheated (I-d ≠ 0). Given the tax, audit and penalty rates in our experiment (see table 1), the income-maximizing strategy in all three treatments is to evade all tax: the expected monetary value of a strategy of general tax evasion is strictly higher than the expected monetary value of any level of tax compliance as figure A1 in the appendix simulates for the minimum and maximum income.
The baseline corresponds to the bare bones deterrence model: tax compliance is encouraged, and tax evasion deterred, solely by the threat of audits and fines. The expected utility of (non-)compliance depends entirely on the audit rate and the level of fines. Importantly, neither the audit rate nor the size of the fine varies across rounds or participants. They are set at levels that would not deter a fully-informed and rational monetary utility-maximizer. Hence, in a neo-classical framework we would expect no participant to pay any tax (zero compliance).
The donation treatment extends the baseline by adding an immaterial reward for tax compliance. Participants are offered a choice between three alternative spending purposes . They can earmark their money either for recreational facilities on Campus, and/or for the financial support of needy students, and/ or for the invitation of VIPs to campus. The participants can freely allocate their tax payments among these three purposes – but only if they are not found cheating. In case they are audited and found to have evaded tax, the evaded taxes and the fine go straight to the general budget of Jacob University‘s student government. The opportunity to decide on the spending purpose is then foregone. Importantly, the expected monetary utility of non-compliance does not change from the
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baseline. The present monetary value of a strategy of zero compliance is still strictly higher than the present monetary value of a strategy of full or partial compliance. What may change, however, is the subjective value of the tax payment for the participant. It may no longer be conceived solely as a pure cost but also as an opportunity to exercise agency (Lamberton et al. 2014) and to benefit from the “warm glow” (Andreoni 1990) of prosocial giving. We therefore expect an increase in tax compliance relative to the deterrence baseline.
The lucky treatment also builds on the baseline, but adds a material reward for tax compliance. Under this treatment, participants who are audited and found to be honest receive a lottery-ticket with a one in 800.000 chance of winning 10.000 Eurosvii
. Again, the baseline calculus of tax compliance does not change: tax evasion remains the dominant strategy for maximizing expected monetary income. The low probability of winning 10.000 Euros simply does not compensate for the relatively high probability of saving money through tax evasion. Still we would expect tax compliance to increase because people are known to systematically overrate low probabilities (prospect theory), because they fancy the idea of getting something big for almost nothing (Perez and Humphreys 2013) and because they generally enjoy the “dream of the ‘good life’” (Casey 2008: 122) embodied by a lottery ticket.
4. Results
Table 3 shows the effects of our treatments on tax compliance using ordinary least square regressions with robust standard errors. The findings suggest that positive rewards affect tax compliance behaviour but that the size and direction of the effect is conditioned by gender.
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Model 1 compares tax compliance under the two reward treatments (lucky and donation) to tax compliance under the baseline. The findings suggest that the reward treatments decrease rather than increase tax compliance (see appendix figure A2). While the effect is not statistically significant, it is quite consistent across rounds (see appendix figure A3). In all rounds, participants cheat most under the lucky treatment, and cheat least under the baseline treatment. Tax evasion under the donation treatment is always in between these extremes. On the basis of this evidence we would have to reject our hypothesis: if positive rewards have any effect on tax compliance at all, it is negative rather than positive.
Table 3 about here
Model 2 (table 3) includes a dummy variable for women. The results are in line with previous findings on gender differences in tax compliance (e.g. Friedland et al. 1978, Spicer & Becker 1980, van Dijke & Verboon 2010): Women are generally more compliant than men (see dotted line in figure 1). This level effect is weakly significant. As model 3 reveals, however, what matters is not so much the gender difference in general compliance levels but the gender difference in the direction of the treatment effect. Including interaction terms of the female dummy with the two reward treatments (donation and lucky), model 3 reveals important interaction effects. We graph them in figure 1.
Figure 1 highlights four gender differences. First, most obviously, the reward treatments (Donation and Lucky) elicit opposite responses in male and female participants. While female
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participants react with a moderate reduction of tax evasion, in line with our hypothesis, male participants react by a strong increase in tax evasion, against our hypothesis.
Second, the deterrence approach (i.e. the baseline) best ensures tax compliance among men but is the least effective approach to ensuring tax compliance among women. While female participants evade less tax on average across all three treatments (see model 2), they evade more tax under the baseline than their male peers. In fact, male participants in the baseline group show the highest absolute level of tax compliance of all comparative groups in figure 1. Even under the lucky treatment, i.e. the treatment where women are most compliant, they evade slightly more tax than male participants under the deterrence baseline.
Figure 1 about here
Third, treatment effects are much larger among the male than the female participants. Most prominently, male compliance under the lucky treatment is only one third of male tax compliance under the baseline. Male lucky compliance is also dramatically lower than female compliance under any of the three treatments. Model 1’s finding that positive rewards reduce overall tax compliance is entirely driven by the strong negative reactions of the male participants which completely swamp the weakly positive reactions of the female participants.
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Finally, figure 1 suggests (as also figure 2) that men react more strongly to the difference between the immaterial donation treatment and the material lucky treatment. For women, by contrast, this difference hardly matters.
Obviously, not all differences between sexes and treatments are statistically significant (see table 3 and figure 1). Given the low number of participants per category (three treatments*two genders), this is unsurprising. Yet, the differences are very consistent across rounds. As figure 2 shows, male participants consistently evade most tax under the lucky treatment and evade least tax under the baseline treatment. With female participants it is the opposite. And across all rounds, treatment effects are larger for men than for women. The overall consistency of the findings increases our confidence in their robustness.
Figure 2 about here
As a further robustness check, we compare the extreme strategies of full compliance (i.e. declaring 100 percent of income across all rounds) and zero compliance (i.e. evading 100 percent of income across all rounds). As figure 3 shows, women are generally more likely to opt for full compliance, and men are more likely to opt for zero compliance. The baseline treatment is the only case where more men are fully compliant than women. Also, the baseline treatment is the only treatment under which no participant opts for zero compliance.
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Finally, we also checked for the influence of socio-demographic controls other than gender: age, class, religiosity, and home-country tax morale. None of these variables affected the results. We also checked whether the experiment affected the subjective well-being of the participantsviii
but found no evidence for that.
5. Discussion
As the previous section has shown, positive rewards didn’t affect aggregate tax compliance levels in our sample because the reward treatments significantly interact with gender: while positive rewards increased female tax compliance they strongly decreased male compliance. How can we account for this pronounced gender difference? Taking our cue from the approaches to tax compliance discussed in section 2, we explore three possible explanations. First, our ‘positive’ rewards have negative utility for men. Second, the reward treatments reduce the perceived audit probabilities of male (but not of female) participants and thus “crowd-out” (Frey and Jegen 2001) threat-based motivations to comply. Third, the reward treatments erode the feeling of normative obligations to pay taxes in male (but not in female) participants and thus undermine norm-based motivations to comply.
Wrong rewards?
Could it be that our rewards (lucky and donation) were perceived as unattractive and harmful by male participants? This is unlikely! As noted above, we did not find any association between treatment groups and participants’ subjective well-being during or after the experiment. Also, quite obviously, men do play the lottery in the real world and donate
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to charitable causes. In fact, American men gamble on the lottery more than women (Barnes et al. 2011). And there is no conclusive evidence that men are less socially oriented than women (Croson and Gneezy 2009). Research by Andreoni and Vesterlund even suggests that men behave more altruistically when altruism is “cheap” (Andreoni and Vesterlund 2001). If this was true, the male participants in our experiment should have reacted positively to the costless option of prosocial-giving offered by the donation treatment. In short, we do believe that our rewards have positive utility for male and female participants alike. If they fail to raise male compliance nevertheless, this must be because their positive motivational force is swamped by negative side-effects.
Changes in perceived audit probabilities?
One possible side-effect could be a change in perceived audit probabilitiesix
. Perhaps our reward treatments induce participants to reassess the risks associated with non-compliance and thus inadvertently change participants’ threat-based motivation to comply (Frey and Jegen 2001: 592): Compared to the baseline, the reward treatments confront participants with a more complex decision environment; participants think harder about the decision problem, which in turn increases their awareness of each individual decision factor including audit probabilities. Yet, why should the direction of the reassessment vary in gender? Why should male but not female participants adjust perceived audit probabilities downward?
The answer, we surmise, is gender-differences in risk preferences. There is extensive evidence that men are more risk-seeking than women in laboratory experiments and in decision-making situations in the field. The reasons are not entirely clear. Perhaps women
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avoid risky situations because they experience them as emotionally stressful. Perhaps men seek risky situations because they perceive them as challenging and ego-involving, or because they tend to be overconfident of their success (see Croson and Gneezy 2009: 449-454 for a review). Perhaps the gender difference in risk behavior reflects differences in nurture: boys and girls tend to be raised differently. Perhaps they reflect differences in nature: female reproductive success tends to depend on risk avoidance, male reproductive success on risk acceptance (e.g. Niederle and Verstelund 2007: 1070-1071). Whatever the reason, the higher risk-tolerance of men may bias them towards adjusting perceived audit probabilities downward in our experiment. Especially the low winning probabilities under the lucky treatment could alert them to the relatively high ‘winning’ probabilities of non-compliance. This would explain why male compliance is so dramatically low under this treatment.
Changes in perceived normative obligation?
Another side-effect of positive rewards could be a change in the normative framing of tax payments. Perhaps the reward treatments introduce an element of voluntarism into the taxpaying situation that erodes feelings of civic responsibility and normative obligation (Frey and Jegen 2001: 597). But why should this mechanism only erode male but not female compliance?
One possible explanation is nurtured gender- differences in social attitudes. Following Gilligan (Gilligan 1982) various authors have argued that men tend to make decisions on the basis of fairly rigid normative principles while women are more situationally opportunistic in
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their judgements: Men do what they consider the normatively ‚right‘ thing to do; women do what they consider the socially conducive thing to do (Croson and Gneezy 2009; Eckel and Grossman 1996). Paying taxes may still be the socially conducive thing to do, if a positive reward is added to the normative duty to pay. This would explain why female tax compliance improves slightly under the two reward treatments. However, paying taxes may no longer appear to be the normatively required thing to do, if combined with rewards appealing to the taxpayers‘ individual utility. Prima facie, of course, it looks plausible to sell tax compliance to taxpayers in the same way that food makers sell breakfast cereals to consumers, namely by linking it to a lottery (Martin and Dolan 2010) or to a charitable cause. In so doing, however, one may inadvertently reduce the taxpayer‘s sense of civic duty to pay taxes to the consumer‘s sense of duty to brand loyalty. To the extent that men are more normatively driven than women they react stronger to this reward-induced erosion of normative obligation.
While our explanations are tentative and post hoc, they are consistent with other gender-by-treatment interaction effects that are reported, but hardly theorized, in the literature. Hasseldine and Hide find in a field experiment that men react with more and women with less compliance to negatively framed messages concerning their tax liability (Hasseldine and Hite 2003). Chung and Trivedi report that “friendly persuasion” increases tax compliance in women but not in men (Chung and Trivedi 2003). And Kastlunger and colleagues observe that the experience of an audit triggers significantly lower tax compliance in men than in women (Kastlunger et al. 2010). Neither of these studies offers a coherent explanation for the gender-by-treatment interactions they observe. The two explanatory mechanisms
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suggested above – differences in risk preferences and in social attitudes – potentially fill this gap.
More research is necessary to understand gender-effects in tax compliance. This requires, most basically, that researchers routinely control for and report the gender of their participants (as suggested by Croson and Gneezy 2009: 468). Surprisingly few do so. In the sample of 25 experimental studies that we mainly consulted when writing this article, only 13 reported gender controls (see appendix, Table A1). A second requirement is that researchers check for gender-by-treatment interactions. As our experiment shows, gender matters not only for the level but sometimes also for the direction of treatment effects: We don’t find a main effect because the opposing treatment effects for male and female participants cancel each other out. Had we not controlled for the interaction with gender, we would have been led to the false conclusion that positive rewards don not matter for tax paying behavior. Unfortunately, only very few studies control for and report gender interactions in addition to gender dummys. In our sample of 25 studies, only 5 do so (see appendix, Table A1).
6. Policy Implications?
Should Greece introduce a receipt-based VAT lottery after threats (i.e. fines for consumers who leave business premises without a purchase receipt) and normative appeals (i.e. a patriotic campaign for tax compliance) have failed to curb tax evasion (Fooken et al. 2014: 17)? Should reward-systems such as the Spanish income tax designation scheme or the Japanese hometown tax be copied by other countries? Our findings don’t allow for an easy
25
answer. They point at two fundamental problems of reward-based tax compliance schemes that deserve further investigation, preferably in randomized controlled trials in the field that transcend the inherent limits of our laboratory experiment (John et al. 2013).
One problem is that positive rewards may, under certain conditions, crowd-out threat-based or norm-based motivations for tax compliance. While excessive fear of the tax authorities may alienate taxpayers, excessive rewards may also inadvertently erode compliance by reducing the deterrence value of audits and fines or by obscuring the obligatory character of taxation. Obviously, governments should make tax compliance as simple as possible. Yet they should not necessarily make it positively rewarding for the individual taxpayer. Some
activities may have community-building power precisely because they are not completely painless, including death and taxation.
A second problem is that positive rewards may affect men and women differently. In our experiment, women evade the most under the baseline deterrence approach while men evade the least under this approach. Apparently, there is no unisex strategy for optimal tax compliance. Does it follow that governments should gender their tax compliance regimes, i.e. impose threat-based deterrence on men and offer gentle rewards to women? This would resonate with a new literature promoting gendered tax rates on efficiency grounds (Alesina et al. 2011). Yet it contradicts recent efforts to eliminate (usually pro-male) gender biases in taxation on equity grounds. Examples include disallowing the husband to submit a family tax return without the explicit consent of his wife (France), equalizing tax allowances between men and women (Netherlands), and applying the same tax rates to married men and women (South Africa)(Stotsky 1997; UNDP 2010). Same tax duties seem to imply a right to same tax treatment. Yet treating essentially dissimilar events similarly is also unfair. Our research
26
should stimulate not only new empirical research into (natured or nurtured) gender heterogeneities in the treatment effects of tax reforms but also normative research into the conditions under which different genders deserve or don’t deserve different policy treatments.
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Contact Details
Prof. Dr. Hilke Brockmann
School of Humanities and Social Sciences Jacobs University Bremen gGmbH
P.O.Box 750 561 28725 Bremen Germany Phone: +49 (0)421 200 3491 Fax: +49 (0)421 200 49 4347 Email: h.brockmann@jacobs-university.de
Prof. Dr. Philipp Genschel
Joint Chair RSCAS Professor of Comparative and European Public Policy Robert Schuman Centre for Advanced Studies
European University Institute Via delle Fontanelle 18
50014 San Domenico di Fiesole (FI) Italy
Phone: +39 (0)55 4685 735 Fax: +39 (0)55 4685 279
Email: philipp.genschel@eui.eu
Laura Seelkopf, PhD
Research Center on Inequality and Social Policy University of Bremen Mary-Somerville-Straße 5 28359 Bremen Germany Phone: +49 (0)421 218 58605 Fax: +49 (0)421 218 58622 Email: laura.seelkopf@uni-bremen.de
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Tables and Figures
Table 1: Experimental Setup of the Tax System
Rounds Income per Round (I) Tax Rate (t) Audit Rate (a) Penalty (p)
6 240 Token fixed 160 Token flexible
increasing from 10 percent (first round) to 60 percent (final round)
5 % equivalent to the amount of evaded tax
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Table 2: The socio-demographics and performance of the participants
Total By Treatment No
answer Baseline Donation Lucky
Socio-demographics
Number of Participants 97 34 30 33 na
Average Age 21 20 21 21 3
Number of participants by gender 0
Male 48 17 17 14 na
Female 49 17 13 19 na
Number of Religious Participants 46 18 14 14 10
Number of Econ Majors 7 4 1 2 1
Number of Participants by Social Class 1
Lower 11 3 1 7 na
Middle 75 27 24 24 na
Upper 10 4 5 1 na
Average Homecountry Tax Belief 3.7 3.6 3.8 3.7 22
Performance
Average Gross Lab-Income (in tokens) 1620 1608 1607 1645 na
Average Knowledge 22 21 21 24 na
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Table 3: Three Regression Models of Tax Compliance
(1) (2) (3) Donation -11.41 -10.41 -26.25** (9.468) (9.689) (12.67) Lucky -13.68 -14.82* -47.61*** (8.965) (8.848) (11.74) Female 14.98* -15.37 (7.623) (11.96) Female*Donation 31.88* (18.95) Female*Lucky 60.95*** (16.17) Constant 66.16*** 58.67*** 73.85*** (6.033) (7.487) (8.368) Observations 97 97 97 R-squared 0.026 0.065 0.177
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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Appendix
Table A1: Gender in Tax Compliance Experiments
Without Gender Dummy Alm et al. 1993, Alm et al. 1995, Alm and McKee 2004, Bosco and Mittone 1997, Casey and Scholz 1991, Cummings et al. 2009, van Dijke and Verboon 2010, Guth et al. 2005, Kastlunger et al. 2009, Kirchler et al. 2009, Maciejovsky et al. 2007, Trivedi et al. 2003 With Gender Dummy Alm et al. 2010, Bayer and Sutter 2009, Coricelli et al.
2010, Gerxhani and Schram 2006, Heinemann and Kocher 2010, Spicer and Becker 1980, Spicer and Hero 1985, Wahl et al. 2010a
With Gender Dummy and Gender*Treatment Interaction
Cadsby et al. 2006, Chung and Trivedi 2003, Hasseldine and Hite 2003, Kastlunger et al. 2010, Wahl et al. 2010b
Literature in A1:
Alm, J.; Cherry, T.; Jones, M. & McKee, M. (2010), 'Taxpayer Information Assistance Services and Tax Compliance Behavior', Journal of Economic Psychology 31, 577-586.
Alm, J.; Jackson, B. R. & McKee, M. (1993), 'Fiscal Exchange, Collective Decision Institutions, and Tax Compliance', Journal of Economic Behavior and Organization 22, 285-303.
Alm, J. & McKee, M. (2004), 'Tax compliance as a coordination game', Journal of Economic Behavior and Organization 54, 297-312.
Alm, J.; Sanchez, I. & de Juan, A. (1995), 'Economic and Noneconomic Factors in Tax Compliance', Kyklos 48(1), 3-18.
Bayer, R.-C. & Sutter, M. (2009), 'The excess burden of tax evasion - An experimental detection-concealment contest', European Economic Review 53(5), 527-543.
Bosco, L. & Mittone, L. (1997), 'Tax evasion and moral constraints: some experimental evidence', Kyklos 50(3), 297-324.
Cadsby, C. B.; Maynes, E. & Trivedi, V. U. (2006), 'Tax compliance and obedience to authority at home and in the lab: A new experimental approach', Experimental Economics 9, 343-359.
Casey, J. T. & Scholz, J. T. (1991), 'Beyond Deterrence: Behavioral Decision Theory and Tax Compliance', Law and Society Review 25(4), 821-843.
Chung, J. & Trivedi, V. U. (2003), 'The Effect of Friendly Persuasion and Gender on Tax Compliance Behavior', Journal of Business Ethics 47(2), 133-145.
Coricelli, G.; Joffily, M.; Montmarquette, C. & Villeval, M. C. (2010), 'Cheating, Emotions, and Rationality: an Experiment on Tax Evasion', Experimental Economics 13, 226-247.
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Cummings, R. G.; Martinez-Vazquez, J.; McKee, M. & Torgler, B. (2009), 'Tax morale affects tax
compliance: Evidence from surveys and an artefactual field experiment', Journal of Economic Behavior and Organization 70, 447-457.
van Dijke, M. & Verboon, P. (2010), 'Trust in Authorities as a Boundary Condition to Procedural Fairness Effects on Tax Compliance', Journal of Economic Psychology 31, 80-91.
Gërxhani, K. & Schram, A. (2006), 'Tax evasion and income source: A comparative experimental study', Journal of Economic Psychology 27, 402-422.
Guth, W.; Levati, M. V. & Sausgruber, R. (2005), 'Tax morale and (de-)centralization: An experimental study', Public Choice 125, 171-188.
Hasseldine, J. & Hite, P. A. (2003), 'Framing, gender and tax compliance', Journal of Economic Psychology 24, 517–533.
Heinemann, F. & Kocher, M. G. (2010), 'Tax Compliance Under Tax Regime Changes'(10-020), Technical report, Centre for European Economic Research.
Kastlunger, B.; Dressler, S. G.; Kirchler, E.; Mittone, L. & Voracek, M. (2010), 'Sex differences in tax compliance: Differentiating between demographic sex, gender-role orientation, and prenatal masculinization (2D:4D)', Journal of Economic Psychology 31, 542-552.
Kastlunger, B.; Kirchler, E.; Mittone, L. & Pitters, J. (2009), 'Sequences of audits, tax compliance, and taxpaying strategies', Journal of Economic Psychology 30, 405-418.
Kirchler, E.; Muehlbacher, S.; Hoelzl, E. & Webley, P. (2009), 'Effort and Aspirations in Tax Evasion: Experimental Evidence', Applied Psychophysiology: An International Review 58(3), 488-507. Maciejovsky, B.; Kirchler, E. & Schwarzenberger, H. (2007), 'Misperception of chance and loss repair:
On the dynamics of tax compliance', Journal of Economic Psychology 28, 678–691.
Spicer, M. & Hero, R. (1985), 'Tax Evasion and Heuristics', Journal of Public Economics 26, 263-267. Spicer, M. W. & Becker, L. A. (1980), 'Fiscal Inequity and Tax Evasion: An Experimental Approach',
National Tax Journal 33(2), 171-175.
Trivedi, V. U.; Shehata, M. & Lynn, B. (2003), 'Impact of Personal and Situational Factors on Taxpayer Compliance: An Experimental Analysis', Journal of Business Ethics 47(3), 175-197.
Wahl, I.; Kastlunger, B. & Kirchler, E. (2010a), 'Trust in Authorities and Power to Enforce Tax
Compliance: An Empirical Analysis of the “Slippery Slope Framework”', Law and Policy 32(4), 383-406.
Wahl, I.; Muehlbacher, S. & Kirchler, E. (2010b), 'The Impact of Voting on Tax Payments', Kyklos 63(1), 144–158.
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i
We thank Clara Volintiru, London School of Economics, for sharing this example.
ii
Again, we thank Clara Volintiru for the information on Romania.
iii
We thank Christian von Haldenwang, German Development Institute, for this example.
iv
The sample size was determined by power calculations for a linear multiple regression with up to 10 indicators, small to medium effect sizes, and an α-error probability of 5 to 10%.
v
The external validity of laboratory experiments on tax compliance is often doubted because the students typically participating in such experiments are not representative of the general population and usually lack first-hand experience with income tax payments. Alm, Bloomquist and McKee investigate this issue by comparing the tax compliance behavior of students and non-students in experimental and non-experimental settings. They find no significant behavioral differences across groups and settings (Alm et al. 2015, see also Druckman and Kam 2011 for a defense of working with a “narrow data base” of student subjects). Still, it would be best to triangulate our laboratory findings with evidence from field experiments that include people who are actual (rather than just hypothetical) income taxpayers.
vi
The relevant item from the World Value Survey asks: “Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between: ... Cheating on tax if you have the chance.” Answers are registered on a ten-point scale where 1=never and 10=always.
vii
Note, the chance of winning 10.000 Euro was real. The participants knew that the respective lottery tickets were available for immediate distribution.
viii
Participants were asked before and after the experiment “How happy are you now?“ They could chose on a scale from 0 (totally unhappy) to 10 (totally happy). A differently worded version of the same question was asked in the middle of the experiment (after round 3).
